Beyond the traditional cottage: Vacation home alternatives

Owning a cottage in popular destinations, such as Whistler, Canmore or Muskoka, is out of the budget for many. Vacation condos can be a good alternative but aren't the only cost-effective option. Here are 4 more vacation property ownership options

Vacations give us time with family and friends while kicking back and relaxing. It’s only natural to want to hold on to that feeling. For many that means jumping into the vacation-home property market. At this point, a buyer may become a little overwhelmed with all the choices and all the factors to consider. Should I buy a vacation home for me and my family or as a way to make some extra money? What type of rental should I buy? What other factors should I consider? There are a few different types of vacation home alternatives to invest in depending on your lifestyle, needs, and budget.

Buy only with your own needs in mind

The Realtors association surveys find that the primary motivation for a vacation-home purchase is vacationing — and many experts think that’s the best way to approach the deal. Buying a property primarily to earn rental income can get risky. Rental income is so unpredictable and often takes quite a bit of work to make. As a result, any rental income earned should be considered gravy. As a result, a vacation property buyer shouldn’t expect the rental income to cover mortgage and maintenance costs.

Vacation property upkeep is expensive

Just like your home, a vacation property will require upkeep and maintenance. This can be the big stuff — such as replacing windows or the roof — or it can be little stuff like clearing gutters and replacing furnace filters. While these tasks may not be overwhelming for some property owners, the fact that you’re not at the property year-round can make staying on top of the maintenance schedule difficult.

One way around this difficulty is to purchase a property with some built-in oversight. Condos are great for this as vacation property owners get the convenience and ease of owning a vacation rental but without much of the maintenance hassle that comes from property ownership.

As part of a larger complex, your condo fees come with assurances that the external portion of the complex will not fall into disarray while you are away from your unit. But owning a condo isn’t the only way to buy a year-round vacation property with some built-in maintenance protection. Here are four other vacation-ownership options:

1. Shared Resort Ownership

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Shared resort home ownership can be confusing since it comes in several varieties, each with its pros and cons. The three types are: shared deeded ownership, shared leased ownership, and shared ownership under a right to use agreement.

Shared deeded ownership is often sold as timeshares and represents the closest equivalent to owning a property outright. Each owner has a percentage of the property itself and receives a deed for that percentage. The deed specifies the terms of property use, for example, the number of weeks, the blocks of the year these weeks can fall into, whether the owner can buy additional weeks, and whether they can trade those weeks with other members or through week exchange clubs. The latter have their own rules in place, and they fall outside the scope of the unit’s deed. With shared deeded ownership, ownership never expires since it is deeded, and the owner can freely transfer, rent, gift, or leave it as an inheritance to anyone he or she wishes.

Similar rules apply in shared leased ownership in the sense that the owner is entitled to use a property a set number of weeks in specific time blocks. However, there is one key difference: the lease agreement expires after a certain number of years or upon the owner’s death. Since this is technically a lease, it is very difficult to inherit or transfer ownership freely.

In the case of shared ownership under a use agreement, the owner purchases membership credits or points they can trade for holiday weeks. Different weeks have different credit costs, and time blocks in high demand cost more points. Since you don’t actually own any part of the property, there are numerous restrictions when it comes to transferring those credits. The only way to know what you are getting is by carefully examining all the details of the agreement before making a purchase.

2. Fractional ownership

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Fractional ownership is commonly confused with timeshares since they cover a similar recreational niche, and both came into existence in the early 1990s. Unlike certain kinds of timeshares, a fractional home is a fully deeded property that you can resell, mortgage (although this would be very difficult and highly unlikely), leave in a will, or transfer, just like you could do with any condo or home. Each owner has access to the property for a prescribed amount of time, typically on a rotational basis that includes a week per month. Some fractional units allow you to rent out the weeks you are not using, which gives you an opportunity to generate revenue and offset the maintenance costs. A strata company usually handles maintenance.

Among the main considerations here is the fact that fractional properties are typically purchased in cash since financial institutions, including private lenders, steer clear of them. The few that offer to finance may require a down-payment of up to 65%. Strata fees tend to be higher than for a condo, even when you consider the usage difference between them. And since the typical family only holidays an average of three weeks a year, you may end up with far more recreation time on your property than you could possibly use.

3. Cond0-hotels

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The concept of a condo-hotel is brilliant, but for everyday investors, the returns are a bit less than lacklustre. The idea is that an investor buys a condo unit in a luxury resort hotel. The condo can be used for personal use as often as the investor wishes and, because it’s located in a resort, you get to take advantage of the amenities, which often includes room service, pools, spas among other luxury amenities. When you aren’t using the unit, the resort will rent out your space and you get to keep a percentage of the profits.

Because of the luxury condo resort angle, the price you pay for a condo-hotel can be substantially higher, however, the option to use the in-house property manager to rent out the unit means you can get back about 50% of the rental income earned on your unit. The problem is condo-hotels have a less than stellar track record as investments. A few years ago, real estate consultant, Ozzie Jurock, stated that every single condo-hotel investment purchased in B.C. had “lost money for the investor.” Why? Part of the reason is timing. These condo-hotels were purchased just before or just after the global credit crunch that started in 2008. That meant fewer people travelling and even fewer cashing in on luxury travel options.

Another factor is that you’re competing against the big-chain hotels and resorts. The rule of thumb is that a hotel room must earn $1 per night for every $1,000 it costs to buy or build the unit. That means if a condo-hotel costs $125,000, then the room has to rent for $125 per night, on average, and be occupied 60% to 70% of the time. A quick scan through the travel listings will show many rooms in this price range, which means you’ll have a lot of competition to earn a profit.

4. Travelling homes (RVs)

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Who doesn’t love the idea of a mobile hotel on wheels? It’s a reliable, fairly inexpensive way to tour long distances without having to unpack and repack your bags at every stop.

But to make this type of vacation homework, you need to get educated. The first is to realize an RV doesn’t eliminate all travelling accommodation expenses. An overnight stay at a full-service campground costs between $25 to $45 — making it 75% to 80% cheaper to vacation with an RV versus a condo or vacation rental. When you add in the additional savings by making your own meals and an RV starts to look pretty awesome. But there will be some upfront and ongoing costs to consider.

First, is the purchase price. While you can get financing for an RV, it’s not like a mortgage. Often, financing charges are higher (than typical mortgage rates), making the concept of borrowing to buy a little-less-than appealing. There are also ongoing costs, such as fuel, oil, insurance and other maintenance. Then there are storage considerations. If you can’t park the trailer on your own property, you’ll need to find a safe place to store it and that usually means an additional, on-going cost.

No matter what type of vacation-home type you opt to explore, keep in mind that cost should be only a minor consideration. (The old saying “if you can’t afford it, you shouldn’t do it” rings loud when it comes to any vacation property purchase.) The bigger factors to consider is what type suits your needs and what options give you the most flexibility or options. The idea is to purchase a vacation home type that suits your needs and any secondary bonus, such as potential rental income, should be considered an unexpected benefit.

Zolo Staff

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